Europe’s New Defining Moment

The COVID-19 pandemic represents a major opportunity for the European Union and the eurozone to act decisively on a common problem, thereby strengthening the bloc's solidarity and integration. So far, however, European leaders have failed to seize it.

BARCELONA – The European Union and the eurozone are approaching their second defining moment in a decade. The first was the debt crisis that started in 2010 and was quelled by European Central Bank President Mario Draghi’s July 2012 pledge that the ECB was ready to do “whatever it takes” to preserve the euro. The ECB backed up Draghi’s declaration by introducing the outright monetary transactions (OMT) scheme, an emergency sovereign-bond-purchasing program that fortunately never had to be used.

The EU then established a banking union, with the ECB assuming the role of bank supervisor and a common resolution mechanism dealing with failing institutions. But this union is still incomplete, because the resolution backstop is insufficient for a major crisis and there is no common deposit-insurance scheme.

More generally, as a monetary union that lacks a fiscal union to share risks, the eurozone is an unstable creature. And COVID-19 represents a major shock that calls for huge expenditures – not only on health care, but also to keep the European economy on life support while lockdowns and social-distancing measures are in effect.

Only the public sector can cope with such a challenge. Unfortunately, however, the EU is once again divided between fiscally strong northern member states, led by Germany and the Netherlands, which have debt-to-GDP ratios around 60%, and fiscally weak countries where this ratio is close to or above 100%. Indeed, nine EU countries, led by France, Italy, and Spain, have proposed mutualized “coronabonds” to help mitigate the pandemic’s economic impact. (Portugal, Ireland, Luxembourg, Slovenia, Belgium, and Greece also support the idea.)

But the fiscally strong member states, fearing moral hazard, oppose debt mutualization. Although a symmetric macroeconomic shock like the one the eurozone currently is experiencing weakens the moral-hazard argument, northern countries’ fear is not without merit. After all, most of the countries supporting coronabonds have failed to put their fiscal house in order since the euro debt crisis ended.

Moreover, there are several practical problems with coronabonds, not least the need for guarantees or direct transfers from national budgets, owing to the absence of any European revenues to back such instruments. Germany insists that established EU rescue funds such as the European Stability Mechanism (ESM) be used first. As far as the frugal member states are concerned, now is not the time to establish a eurozone safe asset.

Subscribe to Project Syndicate

Enjoy unlimited access to the ideas and opinions of the world's leading thinkers, including weekly long reads, book reviews, and interviews; The Year Ahead annual print magazine; the complete PS archive; and more – all for less than $2 a week.

Subscribe Now

Nonetheless, an EU program to combat COVID-19 would also help the bloc’s northern members to control the epidemic and limit the damage to their own economies. Without such a scheme, countries like Italy or Spain would be bound to spend too little on tackling the public-health emergency and promoting economic recovery, implying negative effects on public health and economic performance not only in those countries, but also in northern Europe.

Since the European Council’s inconclusive March 26 virtual summit, there has been a range of EU initiatives, including the relaxation of state-aid rules to help troubled firms and, most recently, a €540 billion ($590 billion) spending package to support member states’ economies. The package, proposed by Eurogroup President Mário Centeno, includes up to €240 billion in credit from the ESM, up to €200 billion in loans for small- and medium-size enterprises from the European Investment Bank, and a €100 billion loan plan for unemployment benefits from the European Commission.

Although applying to the ESM is a precondition for the ECB to intervene with the OMT scheme, it carries a stigma and usually comes with conditions. Financing for COVID-19-related expenses, by contrast, will come with no strings attached, though other economic support would carry conditions. Furthermore, EU finance ministers have agreed to establish a temporary recovery fund, which may be financed by “innovative financial instruments.” The battle for partial debt mutualization, pushed by France, has been postponed.

Although these measures go in the right direction – indeed, they have saved the day – the question is whether they will be enough. If not, then the eurozone – and the EU as a whole – will have failed to act decisively on a common problem, and the split between blocs of member states will persist and possibly deepen.

One could argue that the ECB can fix any problem regarding fiscally weak countries’ sovereign debt by again pledging to do whatever it takes. But Draghi was lucky in that the OMT was never invoked, and it is unclear whether those magic words will work this time.

Indeed, if the crisis persists and the public debt of Italy and Spain increases substantially (to, say, 160% and 130% of GDP, respectively), then the markets may test the ECB’s resolve to keep buying these countries’ sovereign debt. The ECB may therefore have to go far beyond its benchmark capital allocation among countries when implementing its recently announced €750 billion asset-purchase program (which remains smaller than Italy and Spain’s estimated debt for 2020). True, the ECB’s action will buy time and give affected countries more fiscal leeway, but, as in the debt crisis, the ECB will remain exposed as long as the eurozone lacks a common fiscal policy.

Once again, the eurozone has responded with more integration only when on the brink of disaster. Let us hope that we are also lucky this time, and that no accident materializes to call the euro’s future into question while Europe muddles through the crisis.

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Matthew. It is not only interesting. It is telling. In Legrain's article about the Marshall Plan, on this page, you will find a similar discussion. It is the Europhile Elite dreaming about their illusion. Drunk by their power and status. Stumbling from one failure to another. In the process they waste the wealth of the EU citizen on a grand scale. The EU citizen they look upon with disdain and they do not listen to. Lack of transparancy and sometimes deceit characterize their communication with the citizen.

Neutral experts agree that the Euro cannot survive (Stiglitz, Mody). It will not only require sizable money transfers from Germany and the Netherlands etc. to the South.It will also require that the Southern countries increase their competitiveness. Adjust their culture: work more, retire later, less centralization, less bureaucracy, reduce pensions, do not spent more than they can afford. Tax integration will not be enough.By the introduction of the Euro ( plus some other mistakes ) the Europhiles ( pushed by Mitterand) have put Europe on a kamikaze flight.The solution is obvious. Just go back to the EEC, the successful common market we had 20 years ago.But the Europhiles, led by France and friends, refuse to see or even discuss that. Anyone questioning the issue is listed as an enemy of the EU, lacking solidarity and even morals. They seek solutions by building ever more debt and ever more complex monetairy devices.The Germans, who have the biggest economy and also have a successful track record, do not provide the leadership needed, because of their history.The longer they proceed on this deadly, and unnecessary, flight the bigger will be the bang.

SE, All too true. Why should the north pay the south's bill forever? However, the flip side is that Euro locks the south into an economic system that is doomed to fail (for the south). The bottom line is that either Germany must accept a permanent transfer union (and a very big one) or Germany must accept the demise of the Euro and the end of "Europe".

Perhaps in bad taste, but us Brexiteers will shamelessly pick the most inappropriate moment to take a pop at the EU, so here goes.

The EU's dire response to date to the pandemic is shining a ruthless searchlight on its defining characteristics: it's slowness to react to rapid change, it's propensity to continually bicker (eg the Eurobonds bunfight, while Rome - or in this case, Lombardy - burns) and it's simultaneously displayed weakness (eg can't deal with Orban) and longing for ever more centrally hoarded power, which is then invariably misdirected into a pointless love of rigid, ossifying process - technocracy for the sake of it. The Euro in particular, is shown up as not fit for purpose (eg the UK will monetise debt via the direct path between The BoE and The Treasury, but Italy cannot, even if it's government wanted to).

And if the EU as an organisaton is not capable of dealing collectively with precisely this type of force majeure crisis, then the question arises: Just what is the point of the EU's existence?

Won't make me popular but I will say that the day Merkel agrees to mutualizing debt is her last day in office. There is no appetite whatsoever in the North to foot the bills for the south. And who can blame them, The south has had a decade to get it's fiscal house in order and couldn't be bothered too. Does anyone believe that the Leopards will change their spots? Or will they expect the North to pay forever? Coronabond are just the camel's nose. Once mutualization is done it will be irreversible. And the north is not interested in paying for the south for all of eternity. Which is what the south has in mind.

New Comment

It appears that you have not yet updated your first and last name. If you would like to update your name, please do so here.

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.